Politics

By Ian Bremmer

Two years ago, there was a debate in Washington about whether a strong Europe or a weak Europe was preferable. There's no disagreement today. A more multilateral U.S. foreign policy needs a stronger Europe. As the G20 weakens the West's global strategic position, the United States will increasingly need coherent policies from its principal allies to maintain its international influence and leadership. Europe, however, appears to be fragmenting.

Witness Germany moving away from EU fiscal targets, which will make it harder for the European Commission to compel other countries to develop credible and consistent fiscal policy. Meanwhile, European tax policy changes need to be implemented to cover the costs of interventions, stimulus packages, and revenue shortfalls-but they have barely begun. Upcoming elections in the United Kingdom could produce major ripple effects next year. And the risk of a complete breakdown in negotiations over Turkey's bid to join the EU could further divide the continent.

Overall, political issues will be tougher to deal with in 2010 than they were at the height of the economic crisis. As things unraveled in late 2008 to early 2009, governments had no choice but to use existing policy tools. Now they may have to take up the difficult task of developing new ones.

The European agenda next year will be full of challenges, many of which require policy coordination. There will be impediments to effectively managing a crisis in a truly pan-European bank; uncertainty over corporate refinancing, particularly in eastern Europe; and emerging political problems combined with social discontent as the difficult tasks of footing the bill for crisis responses become more pressing. At this point, a real move toward greater European consolidation looks like it's still a long way off.

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By Ian Bremmer

Last week was perhaps the most surreal one of Barack Obama's presidency so far. In the midst of a massive internal debate about what to do with a failing war in Afghanistan, he won the Nobel Peace Prize -- a mixed blessing for several reasons.

Domestically, the Nobel creates a problem because it focuses political attention on foreign policy, which is not Obama's strength. To date, the U.S. president hasn't secured any meaningful foreign policy accomplishments. More importantly, foreign policy isn't the part of his presidency that Obama wants to prioritize. Of course, the prize won't damage Obama's approval ratings at home. His initial response to winning the Nobel was suitably modest and low key, and he'll surely dominate airwaves with a rousing speech when he makes his formal acceptance. However broad the criticism, it's hard to blame the president for the fact that the Norwegians apparently really like him. The challenge will arise in December when Obama flies to Oslo. He'll have to talk up his foreign policy agenda, taking critical headline space away from healthcare reform and the U.S. economy.

Internationally, the prize is a bigger boon for the U.S. president. It burnishes Obama's multilateralism, and shines a light on the enthusiasm about his presidency that's been evinced in much of the world -- particularly compared to his predecessor. Most of the constraints on Obama's foreign policy are structural, given the international indifference to global leadership in general. But at the margins, playing to more ebullient crowds around the world should give Obama a bit more policy flexibility with international interlocutors.

To date, Obama's foreign policy has been largely reactive. He hasn't had the time or the inclination to lay out a sweeping worldview -- a more ideological and strategic approach to foreign policy that would be clearly identified as his own. Instead, his administration's foreign policy has been marked by professionalization, with most of the policy formation done at the bureaucratic level. The Nobel acceptance speech calls for more than that, and it's conceivable that we'll see the outlines of an Obama doctrine in it. It's hard to know what gets top priority in such a speech, but clearly democratic values would play a greater role, which so far we've only seen in non-priority areas (such as in Obama's trip to Ghana, which snubbed Nigeria). But if that's true, it could create conflict. A U.S. grand strategy driven by values is less likely to prove as compatible with the "pragmatic growth" approach of Beijing or authoritarian Western allies in the Middle East.

Ian Bremmer is the president of Eurasia Group.

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By Eurasia Group analyst Seema Desai

After the Congress party received a strong mandate in May 2009, investors hoped that India's unfinished reform agenda would resume. Without the left parties, which held back many market-oriented reforms during its previous term, they thought that the Congress party would be able to power ahead without opposition. The new government fed the euphoria, promising to implement a wide range of policies that would cheer investors -- including disinvestment in state owned enterprises, tax reforms, banking, and insurance reforms, and a move toward market pricing of fuel. The party also planned to institute policies that would improve the condition of farmers, develop better infrastructure (e.g., roads, transport systems, and electricity), free up energy markets, promote job growth, and push forward judicial reforms.

But the government's first 100 days, completed in late August, have been disappointing. Much of the progress so far has been on tax and fiscal policies that are essential to narrow the fiscal deficit which, at more than 10 percent of GDP, has reached alarming proportions. In other areas, such as banking and financial reforms, the government is moving slowly in the wake of the global financial crisis. Moreover, there has been no movement on reforms in the agriculture and energy sectors largely because of the complex vested interests involved.

Since the early 1990s, India has had successful reformist episodes in which the government has been able to prevail over vested interests, but these periods have typically occurred after an economic or financial crisis, or because the top leadership believed in reforms and fought off internal political opposition to them. Now, however, the leadership's mantra of inclusive growth clearly indicates a focus on redistribution -- high taxes for high welfare spending, with a focus on programs to uplift the disempowered in rural and urban areas.

While the overall prognosis for economic reforms during the rest of the government's term is not particularly promising, there will be important progress in certain areas. A new fiscal responsibility law, implementation of tax reforms, and disinvestment in state owned enterprises will happen in 2010 and 2011. Incremental policy changes in the finance and banking sectors are also likely. Kamal Nath, the new minister of roads and highways, is trying to start transport infrastructure building, though he has been inexplicably slow in announcing changes to the public-private partnership framework. None of these are areas will face major political opposition.

In contrast, freeing up agricultural markets and allowing the private sector to trade directly with farmers would mean challenging powerful rural vested interests, which the Congress party is unlikely to do. Facilitating an organized retail sector presents the same obstacles, as does allowing foreign direct investment in the retail industry. Fuel subsidies have long been a drain on India's public finances, but this government is unlikely to be brave enough to remove them and sustain free market prices for any serious length of time.

The best period for reform is between now and 2011, after which the government's focus will shift to the next general election, as well as the upcoming leadership change from Prime Minister Manmohan Singh to Rahul Gandhi, son of party leader Sonia Gandhi. Important state assembly elections (particularly in the battleground state of Uttar Pradesh in 2012) will also make the Congress party even more risk averse than it is now.

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By Eurasia Group senior adviser Jun Okumura and analyst Ross Schaap

The Democratic Party of Japan's (DPJ) huge victory last Sunday will bring considerable domestic policy change. That's where the DPJ's focus will remain for the foreseeable future. Ironically, though, the first policy crunch on a specific issue may come on national security, an area where the Liberal Democratic Party's (LDP) efforts to brand itself as the party most capable of protecting Japan from North Korea, terrorists and pirates fell mostly on deaf ears.

Yukio Hatoyama, the DPJ prime minister to be, has vacillated on the continuation of the refueling operations in the Indian Ocean in support of the NATO effort in Afghanistan. His current position is that Japan will terminate the operation when the current authorizing law expires in January but that he will offer President Obama something better on Afghanistan.

Logic tells us that there are three options: put a substantial number of non-combat personnel on the ground; pay a lot of money; or opt for some combination of the first two. Some DPJ members -- most prominently Ichiro Ozawa -- have long wanted to take the first road and assist the Afghan effort with people on the ground. But that's a risky proposition given the risk-averse Japanese public and the poor conditions there that, moreover, show few signs of improvement any time soon.

Besides, Japan put up a lot of money ($13 billion) for the Gulf War and was widely disparaged for its "checkbook diplomacy"; nobody wants to repeat that painful experience. The refueling operations are a highly effective way for Japan to maintain its seat at the table with minimal financial cost and physical risk. In fact, there have been indications in the recent past that Hatoyama wouldn't mind seeking an extension on his own. The LDP will, of course, be happy to oblige him; which is precisely why this will be such a politically painful course of action for the new administration. Whichever course Hatoyama decides to take, he must make up his mind and take action during the autumn Diet session. Current refueling operations are authorized through January but renewed authorization needs to come in well before that deadline for the Maritime Self-Defense Force to manage deployments.

And besides the refueling operations, it appears the issue of US troop redeployment within Japan will also hit the new government early on. As much as it might prefer to focus on domestic political change, foreign policy matters that have to be addressed will remain a draw on the new cabinet's time.

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By Eurasia Group analyst Alexander Kliment

On July 9, Aman Tuleyev did a remarkable thing. The governor of Kemerovo province in central Russia sent a telegram to global steelmaker ArcelorMittal, which operates three coal mines in the region, demanding that the company continue to operate the mines even if they lose money -- or surrender them to the regional government with zero compensation. This story underlines an important emerging trend for foreign investors in Russia: fear among Russian public officials of rising unemployment has reached a level of urgency that is pushing some of them to extraordinary lengths to stop it.

Faced with dwindling demand for coal this year, ArcelorMittal wanted to cut production and headcount at the mines, which employ about 6,000 people. But in his telegram, Governor Tuleyev warned that his first responsibility was to local workers and that he would not allow closure of the mines under any circumstances. Tuleyev, well known in Russian political circles as a volatile and outspoken crusader for workers, has called in the past for the prosecution of factory owners and the nationalization of their assets. Two days before his warning to Arcelor Mittal, his government seized control of a shuttered electrochemical company after unpaid workers asked for his help.

But this is not a story about one populist governor determined to play the role of friend to the working man. Tuleyev can't do anything with ArcelorMittal mines without (at least) implicit support from Russia's top leadership, and Federal authorities haven't yet weighed in on this issue. In the end, outright expropriation of foreign-owned assets remains unlikely; it would do too much damage to Russia's investment reputation. But the risk for investors in some areas -- especially labor intensive sectors like metals, mining, manufacturing, and automotive -- is becoming increasingly obvious: to preserve social stability, they may be pushed to operate factories or enterprises at a loss under threat of takeover by local authorities. Similar risks could arise even for regional retail and consumer-oriented sectors.

But these governors are responding to increasing political pressure coming from Moscow. Prime Minister Vladimir Putin and President Dmitry Medvedev have pushed governors to deal with rising unemployment and unpaid wages within their provinces without asking federal authorities for help. They can't afford more episodes like the one that took place last month in Pikalyovo, a beleaguered monogorod (a town in which one company employs virtually the entire workforce), where Putin arrived in person to rebuke the owners of shuttered local factories. The prime minister made a show of standing up for the workers and demanding that the factories reopen... before the central government quietly cut the owners -- including well-known oligarch Oleg Deripaska -- a sizable bailout check.

Federal officials can't afford to stage the same show in hundreds of towns and cities and doesn't want responsibility for local economic performance. It's also important to remember that Russia's regional governors are not elected by their constituents. They're appointed by the Kremlin. If a local official like Tuleyev wants to keep his job, he must first please his political masters in Moscow.

Beyond the risks for foreign investors, the seizure of businesses and factories would be bad news for the efficient operations of the companies concerned -- since regional bureaucrats don't usually make effective business managers -- but also potentially for the federal budget. Regional budget revenues, particularly in the regions hardest hit by economic recession, are in freefall this year. Cash-strapped local officials can squeeze regional banks and oligarchs only for so long. Eventually, they will have to turn to Moscow for the money they'll need to keep workers in their jobs. With the fall in prices for oil, gas, and other commodities and the global credit crunch, Russia's economy contracted by about 10 percent over the first half of 2009, and federal budget revenues are falling sharply. More demands from the regions will exacerbate an annual budget deficit already projected at about 8 percent for 2009.

Broadly, Moscow's key political objective of maintaining social stability despite dwindling revenues could begin to place regional officials between a fiscal rock and a political hard place. As that pressure mounts, foreign investors may be among the first to feel the squeeze.

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By Eurasia Group analyst Daniel Kerner

Argentina has seen better days.

Following a dramatic political and economic crisis in late 2001 and the largest sovereign default in recent economic history, Argentina enjoyed a remarkable economic recovery over the next several years. Under President Nestor Kirchner (2003-2007), a favorable international environment helped boost the country's economy at a record pace, enabling him to consolidate power and to become one of the most popular and successful presidents in Argentine history. His popularity (approval ratings of close to 70 percent for most of his mandate) allowed him to transfer political power to his wife, Cristina Fernandez de Kirchner, who was elected president by a comfortable margin in October 2007.

But the trouble began even before Nestor Kirchner stepped aside. Despite his political success, his government's reluctance to address rising inflation, unpaid external debt and energy shortages began to raise doubts over the sustainability of Argentina's growth. Inflation began to climb in 2005. The government responded with expansionary fiscal and monetary policies, manipulated inflation statistics, and heavy and sustained pressure on the private sector to keep prices low. Hopes that the Fernandez de Kirchner administration would more openly address these problems were quickly dashed.

But it was last year's four-month conflict with the farming sector over export taxes that delivered the heaviest blow to the Kirchners' popularity. The conflict began after the government sharply raised taxes on soybean exports and refused to reduce them despite massive protests. The taxes were repealed only after the senate voted against the government's proposal. The government's decision to shore up its fiscal position by nationalizing local pension funds further undermined confidence in both the government and in Argentina's economic prospects.

But it was last weekend's election results that finally closed the door on the Kirchner era in Argentine politics. Months ago, the Kirchners knew they had a fight on their hands. Afraid a bad economy would only get worse, the government surprised many observers by pushing forward the date of mid-term elections from October to June. Aware that even the earlier elections would leave them at a disadvantage in key electoral districts, the Kirchners upped the stakes. Nestor Kirchner himself announced that he would seek a lower house seat representing the province of Buenos Aires.

He lost. And the government lost its majority in both houses of congress. In fact, government candidates fell in most of the country's largest electoral districts, including the Capital, Buenos Aires, Cordoba, Entre Rios, Mendoza and Santa Fe.

The Kirchners were hoping to maintain what was left of their grip on the Peronist Party and to dominate the political agenda heading into the next presidential election in 2011. Instead, the sun rose Monday morning on a new set of opposition leaders, like Vice President Julio Cobos, Senator Carlos Reutemann, and Buenos Aires mayor Mauricio Macri, who are well positioned to challenge for the presidency in two years. The country's most powerful politician, Nestor Kirchner, resigned Monday as leader of the Peronist Party. Though two years remain in her presidency, Cristina Fernandez de Kirchner has become a lame duck.

The key economic policy question is whether the Kirchners, who have refused to negotiate or compromise with rivals both inside and outside the Peronist Party can navigate the newly treacherous political waters.

If so, they'll have to fundamentally shift the way they've done business for the past six years. That's why it probably won't happen -- and why Argentina's political and economic forecast will remain mostly cloudy until a new president is elected in 2011.

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By Ian Bremmer
 
The first five "fat tails" are detailed in the entry below. Here are the second five. Again, each of these scenarios remains unlikely. But in each case, the impact of the global economic meltdown on a particular state's real economy has dramatically increased the likelihood of a fat tail occurring -- from 2 percent or 3 percent six months ago to 10 percent to 20 percent over the next several months, a serious enough concern to warrant focused attention.

6. Turkey's secularists lash out

Reinvigorated by their solid performance in recent local elections and still seething over last year's failed bid to close the ruling justice and development party (AKP), Turkey's opposition secularists in the military, media, and business elite are emboldened to try again, launching a public campaign to build opposition to the ruling party across the country. A sharper-than-expected economic contraction provides them with a new political opportunity to take on the AKP in the courts.

Weakened by the AKP's own poor election showing, Prime Minister Recep Tayyip Erdogan struggles to manage the nationalist and radical Islamist elements within his party. Convinced that his political survival depends more on party unity than on building consensus across the political class, Erdogan overplays his hand by trying once again to amend the constitution. The high court orders closure of the AKP and bans Erdogan from office. Turkey then finds itself in an institutional crisis that brings policymaking -- and the country's bid to join the European Union -- to a grinding halt in the middle of a recession. Foreign investors abandon ship, moving capital into less risky markets.

7. Argentina opens up

Fat tails can offer opportunities as well as risks.  That's the case in Argentina.  There the global recession could unravel the country's economy. The government's inability to manage the fallout would push its poll numbers sharply lower, persuading advisors to President Cristina Fernandez de Kirchner to advance the date of legislative elections from October to June to allow her allies a chance to face voters before the opposition gets organized and the economy deteriorates further. The president's husband, former president Néstor Kirchner, would head the government's legislative list.

Against the backdrop of spiraling social discontent, President Kirchner's Peronist party loses its lower house majority, and Néstor Kirchner would finish behind dissident members of his own party in Buenos Aires. The president resigns, and Vice President Julio Cobos becomes president. Kirchner's departure opens new policy possibilities. The Cobos government reduces state interference in domestic markets, removes restrictions on the farming sector, and improves the transparency (and therefore the credibility) of the national statistics institute. He signs an agreement with the IMF and promises to resolve the country's outstanding debt problems, quelling fears of default. This leads to a serious improvement in market sentiment.

8. The emirates disintegrate

The weakness of existing federal institutions has pulled back the curtain on a serious problem -- Emirati leaders haven't been able to respond in a coordinated way to the financial crisis. Abu Dhabi has jumped in to recapitalize the other emirates, but its strong moves to extend political control could push angry royals in Dubai, Ras al Khaymah and Sharjah, to look for future opportunities to reassert their independence.

Under this scenario, once the financial crisis passes, the smaller emirates try to kickstart their economic programs, provoking a federal veto. Sheikh Mohammed bin Rashid al Maktoum of Dubai tries to reestablish his economic autonomy by launching new infrastructure projects without the approval of Abu Dhabi's al Nahayan family. Abu Dhabi then blocks Dubai's negotiations with international partners, damaging Dubai's credibility and humiliating its royal family. Sharjah tries to restart talks on gas imports from Iran and Ras al Khaymah considers the same option. The Abu Dhabi-dominated federal government opposes the process. The smaller states then create a new federation or simply become independent states, and the UAE federation ceases to exist. The weak institutionalization of federalism and the UAE's increasingly personalized politics make this scenario not quite as unlikely as it seems.

9. Japan's policy paralysis

Japan's Liberal Democratic Party (LDP) will likely lose control of the lower house of parliament, the chamber which selects the prime minister, in an election that must be called by September 10. The opposition Democratic Party of Japan (DPJ) will likely win a majority of seats outright and form a new cabinet or a large plurality and forge a coalition with independents and LDP defectors.

But the more worrisome scenario involves the DPJ failing to win a majority of lower house seats, creating a chain reaction of party schisms that paralyze the coalition building process. The LDP loss aggravates already bitter internal rivalries, splintering the party that has ruled Japan almost continuously for more than 50 years. Internal battles over policy also plague the DPJ. If more conservative DPJ members form alliances with former LDP members, the DPJ could fall apart as well, further complicating the coalition-building process at a moment of economic uncertainty.

Japan is then ruled (as it was during the mid 1990s) by a fragile and fractious multiparty coalition that can't advance reforms needed for response to the economic crisis, deregulation, and foreign-policy priorities like reinvigorated relations with Washington, undermining Japan's value as an economic and security partner. This scenario provokes anxiety over the future strength of the Japanese economy and its security alliance with the United States. It then takes several years for the country's leading political parties to redevelop along ideologically coherent lines.

10. Poland runs off the rails

In Poland, the Civic Platform (PO)-led ruling coalition has successfully promoted a moderate, pro-market, pro-western agenda and has become one of Eastern Europe's most stable and capable governments. But under this fat tail scenario, the global economic outlook pushes Poland into a severe recession. Following an anti-market, anti-foreigner, and thinly veiled anti-banking/anti-Semitic electoral campaign, the populist/nationalist Law and Justice party (PIS) takes power in 2011, and the country turns inward. The new government blames capitalism (as well as the west in general and PO in particular) for all of Poland's ills. Its policy agenda is economically statist and culturally intolerant and nationalist.

The PIS-led government asserts control over a broad range of state and quasi-state companies in sectors like energy, mining, and banking/insurance. Officials appoint boards of directors for these companies based less on competence than on political loyalty. Poland withdraws its commitment to join the eurozone. The government scores domestic political points via attacks on both the EU and Russia -- with negative strategic and economic consequences. PIS launches corruption "witch hunts" against former communists, PO party loyalists, and foreigners, destabilizing Poland's economy and generating capital flight.

Click Here for The 10 crises you aren't expecting but should be (Part 1)

By Eurasia Group analyst Willis Sparks

Abdullah bin Abdul Aziz Al Saud, king of Saudi Arabia, generated headlines a few days ago by naming a woman to fill a cabinet position. Given the kingdom's political culture, that's a remarkable development. But it hints at the much more complicated battle for the kingdom's future now unfolding behind the scenes.

The appointment of Noura al Fayez as deputy minister in charge of women's education made news in the West, but it was just one part of a broader cabinet reshuffle that included the addition of moderates at several state institutions. The underlying message here is that King Abdullah has reasserted his intention to push forward with reform after an extended period of hesitation, one in which conservative Wahhabi forces effectively stalled the reform process.

The reshuffle did not involve strategically vital institutions, like the ministries of oil, the interior or foreign affairs. But the king did make important changes in the Majlis al Shura (consultative council), the military, the judiciary, and the religious police -- an institution that has provoked heated public criticism amid allegations of abuse. The Justice Ministry has been considered a powerful tool in the hands of the conservative Wahhabi establishment, and the king's decision to demote Justice Minister Abdullah al Sheikh to head the less influential Majlis al Shura is consistent with other elements of his reform agenda.

Despite these changes, the road toward substantive and lasting political and social change in Saudi Arabia remains a long one, and the struggle between reformers and conservatives at several levels of Saudi society will continue. The unprecedented appointment of a woman to the cabinet won't trigger an immediate backlash, but there's little question that Wahhabi leaders will see the move as a threat to their influence within government.

This brings us to the declining health of Crown Prince Sultan, heir to the throne.

The Saudi royal family relies for support on the ties that bind senior royals to religious scholars and tribal leaders. Both groups' political weight is vital in times of crisis and confusion, and any candidate to the throne must have the support of Wahhabi scholars. Though Saudi Arabia faces no immediate risk of political instability, Crown Prince Sultan's illness will push the main branches of the royal family to compete for influence in the choice of a replacement.

Two years ago, aware that succession politics might generate conflict and turmoil within the family, King Abdullah created the so-called Allegiance Commission, a body made up of 35 royals responsible for choosing a successor to the current heir apparent. Institutionalizing the process will not head off intense competition among the family's most powerful branches, but in the interest of the kingdom's stability, senior royals will do their best to ensure that conflicts remain behind closed doors.

If the crown prince's health forces him to step aside, his likeliest replacement is Prince Salman, governor of Riyadh and a member of the powerful Sudeyri branch of the monarchy. Most consider Prince Salman a moderate, and he enjoys support from both conservatives and reformers. Yet, King Abdullah may be pushing for the candidacy of Prince Muqrin, the head of the intelligence services, or Prince Mishaal, who heads the Allegiance Commission.

There is little risk that this internal competition (or its outcome) will badly damage the stability of the al Saud dynasty, and the Wahhabi establishment and various tribes will remain at the heart of the kingdom's power structure for years to come. But the succession struggle will make an important difference in the pace of reform in the kingdom. That's why the crown prince's health will remain a subject of intense speculation.

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